Professional liability – the importance of cross-checking meanings and provisions in contracts

In this professional negligence claim, the Court observed “it is the duty of the lawyer to anticipate the unthinkable but predictable”, thereby reminding lawyers of the importance of considering and advising on all the risks, even if they consider a risk to be remote or unlikely to happen in the circumstances.

Background

The facts of the case are as follows:

• Mr Richards and Mr Purves (the Claimants) owned a successful intellectual property (IP) business, called IP Solutions UK, which they started in 2001.
• In early 2014, they wanted to pursue external investment to grow their business and release some capital.
• The Claimants, who owned 42.95% shareholding each in IP Solutions UK, appointed Knight Corporate Finance to provide some advice on their intended proposals.
• The Claimants subsequently entered into negotiations with a private equity house, who proposed an offer that the Claimants would receive £2,297,950 in cash for the sale of their shares in IP Solutions UK, as well as acquiring 30% holding in a newly incorporated company, IP Solutions Group Limited (the Company).
• In addition to the cash and 30% holding, the Claimants would become the CEO and Sales Director of the Company.
• The proposed offer also included terms regarding any rollover equity should the Claimants leave the business, and that this would depend upon the class of leaver.
• A ‘good leaver’ would receive market value for their shares, while a ‘bad leaver’ would receive £1 for their shares.
• The Claimants appointed solicitors, Speechly Bircham LLP (the Solicitors, now known as Charles Russell Speechlys after merging with Charles Russell) to advise them on the proposed terms.
• The transaction was completed on 3 December 2014.

The dispute

Some months after completion, the Claimants were dismissed and required to transfer their shareholdings as ‘bad leavers’. The Claimants sued the Company for wrongful dismissal. The High Court held that the Claimants were only entitled to receive a nominal sum for their shares by virtue of a Redemption Premium Provision (RPP) within the Company’s Articles of Association, irrespective of whether they were deemed ‘good’ or ‘bad’ leavers.

The Claimants then brought an action against the Solicitors for failing to advise them on the terms of the transaction, which meant that regardless of the circumstances in which they left the Company, their shares would only ever be worth a nominal amount. The Claimants argued that a reasonably competent solicitor would have noted the RPP provision within the Articles of Association and advised on the effect of this provision upon exit from the Company.

The Solicitors argued that the RPP provision reflected an agreement reached between the Claimants and Knight Corporate Finance as the RPP was negotiated before the Solicitors were instructed. The Solicitors also argued that the High Court judgment was incorrect as the RPP did not apply in the determination of market value for a ‘good leaver’. The Solicitors argued that as a result they were not obliged to warn the Claimants about the RPP provision.

Decision

The Court agreed with the Solicitors that the High Court judge had misconstrued the meaning of the relevant article in the Company’s Articles of Association and that the RPP would in fact allow market value of the shares for a ‘good leaver’. However, the Court found that the Solicitors had still failed to identify and advise upon the risk that the RPP could have potentially impacted upon the value of their shares upon the exit from the Company and that “a significant risk went unspotted”.

The judge accepted that the risk “materialised through the alignment of a number of factors, none of which would have been regarded as likely”, but he held the Solicitors were “in breach of duty in failing to identify the risks and to take steps with a view of eliminating it”.

The final remarks from the judge were:

The Claimants were awarded a total combined sum of £1,454,000 in damages.

Comment

This case serves as a stark reminder of the duty on professionals to ensure that appropriate warnings are given in respect of risks associated with a transaction, regardless of the likelihood of it happening. 

In light of this ruling, we recommend that professional advisers:

• Review all documents that relate to the instructions given, even if they did not draft those documents.
• Do not assume that appropriate advice has been given on documents and decisions that were made prior to their instruction.

Even if they consider a risk is insignificant, raise this with their client so they can fully consider the potential implications.

Read other items in Professions and Financial Lines Brief – October 2022